Annuities: Keeping The Taxman Away

Variable annuities have flourished as tax-deferred savings vehicles despite their steep fees and high income-tax rates when you begin to make withdrawals. But they have another drawback that's less well known: They're an estate-planning nightmare. If you die before spending your annuity's proceeds, and your estate is greater than the $625,000 that's exempt from inheritance taxes, your heirs--other than your spouse--can get a huge tax bill. After federal and state inheritance levies and income taxes on the gains, as much as 75% of your account's assets may vanish.

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